‘Nothing has blown up’: investors buoyed by solid earnings season

Investors are feeling confident that a better than expected earnings season will extend into its third and busiest week as anticipated weakness in companies exposed to soft consumer spending has so far failed to translate into poor profit results.

August has proved “a lot better than people had expected”, Atlas Funds Management portfolio manager Hugh Dive said.

“Nothing has blown up; I can’t think of any widely held stock that has massively disappointed,” Mr Dive said. “Management teams have generally been pretty positive.”

There are 70 major companies releasing earnings over the coming five days. That list includes household names such as Woolworths on Monday, BHP on Tuesday, Coca-Cola Amatil on Wednesday, Qantas on Thursday and miner South32 on Friday.

Shareholders have thus far been impressed with the profit numbers hitting their screens, providing room for the benchmark S&P/ASX 200 Index to extend its recent rally and hit its highest level since the end of 2007.

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The benchmark measure has climbed 1 per cent this month to hit 6339 points, bringing its year-to-date gains towards 5 per cent, all before dividends. The stockmarket’s rally from its early April lows are even more impressive, now 10 per cent higher.

Even perennial disappointments such as global insurance group QBE reported a “very clean result” last Thursday, Mr Dive said.

The upbeat tone has been reflected in the fact that about three in five reporting companies have enjoyed a share price boost on the day of their announcements, AMP Capital head of investment strategy Shane Oliver said. More than 80 per cent of companies have reported higher profits than a year ago, against the average of 66 per cent.

“That said, it’s often the case that the quality of results tails off in the last two weeks of the reporting season, so don’t get too excited just yet,” Mr Oliver warned.

Impressive results

Earnings numbers from Coles supermarket-owner Wesfarmers, JB Hi-Fi and Commonwealth Bank showed the domestic economy is in “pretty good shape, if slowing a bit at the margin”, Tribeca Investment Partners fund manager Sean Fenton said.

Electronics retailer JB Hi-Fi, the second most shorted stock on the market, again impressed with its results.

Coles reported a lift in like-for-like sales, and investors will be expecting Woolworths has enjoyed a similar gain. Management may also provide a clue into whether the recent kerfuffle around banning plastic bags has had any impact on the bottom line.

A slowing housing market is having some effect on online property classifieds businesses Realestate.com and Domain, as each has warned of an environment of weaker listings, Mr Fenton said. 

But there has been little evidence that the heavy scrutiny on banks from the royal commission has translated into difficulty for smaller ASX-listed businesses to access loans, Celeste Funds Management chief investment officer Frank Villante said.

“Companies keep suggesting that for the right transaction bank funding is not an impost, that pricing is sharp, and that terms and conditions are no more onerous than was the case in recent times,” Mr Villante said.

Although credit is available, “demand is anaemic from corporates, big and small”, he said.

Tribeca Investment Partners' Sean Fenton says company results point to an economy in
Tribeca Investment Partners’ Sean Fenton says company results point to an economy in “pretty good shape”.

Peter Braig

While the sharp falls in currencies from Turkey to India and South Africa have driven capital out of emerging market equities and bonds, a near 10 per cent fall in the Aussie dollar from its January high of US81¢ to around US73¢ “is a clear tailwind for ASX earnings”, Morgan Stanley equity strategists told clients.

‘This tailwind could re-emerge’

The broker calculates that a weaker currency will provide “material benefits” to close to a quarter of top 200 industrials companies by market capitalisation.

“After three years of stability, this [currency] tailwind could re-emerge.”

Morgan Stanley’s currency experts predict the Aussie will end the year around US67¢.

Mr Villante said he expects more companies will try to push through price rises in this financial year, blaming cost pressures from the weaker Aussie.

“I think the reality of the situation is far more complex, and that pricing pressure out of China and south-east Asia have been subdued,” Mr Villante said.

Shareholders will also be focused on the reports of companies exposed to global economic activity, such as Amcor on Tuesday, and Boral, which reports the following week.

“It will be interesting to see whether there is any disruption to global growth from trade tensions,” Mr Fenton said.

These issues are also front and centre for shareholders in mining companies, particularly as prices for commodities such as copper, oil and gold have tumbled in recent weeks, under pressure from a rising dollar and worries around slowing Chinese growth.

With prices for their products falling, rising costs is a “key theme” for the miners, Mr Dive said, adding he  “would be surprised” if BHP, South32 and gold producer Newcrest Mining did not reveal those same pressures observable in Rio Tinto’s results.

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